1 the Collateralisation and Securitisation of Intellectual

The Collateralisation and Securitisation of Intellectual Property Submitted by Marilee Owens-Richards Queen Mary, University of London Submitted in partial fulfilment of the requirements of the Degree of Doctor of Philosophy Supervisor: Dr. Spyros Maniatis Submitted: 6th May 2016 1 STATEMENT OF ORIGINALITY I, Marilee Owens-Richards, confirm that the research included within this thesis is my own work or that where it has been carried out in collaboration with, or supported by others, that this is duly acknowledged below and my contribution indicated. Previously published material is also acknowledged below. I attest that I have exercised reasonable care to ensure that the work is original, and does not to the best of my knowledge break any UK law, infringe any third party’s copyright or other Intellectual Property Right, or contain any confidential material. I accept that the College has the right to use plagiarism detection software to check the electronic version of the thesis. I confirm that this thesis has not been previously submitted for the award of a degree by this or any other university. The copyright of this thesis rests with the author and no quotation from it or information derived from it may be published without the prior written consent of the author. Signature: Marilee Owens-Richards Date: 6th May 2016 Details of collaboration and publications: 2 ABSTRACT Intellectual Property (IP) is becoming an increasingly important source of collateral in debt-based financial transactions. This thesis will show that IP and financing are intrinsically linked. They both can be used to drive company growth. When the two interact a virtuous growth spiral can form. It will be shown that IP can be used to obtain financing which allows for company growth and the creation of more IP rights. The new IP rights then allow the IP owner to obtain more financing. The pattern of growth can continue in this pattern. However, due to the legal complications the formation of such a growth spiral is hindered. The thesis examines how security interests in intellectual property right are treated in secured finance law and IP law in the US and the UK. It will show that there is a conflict between laws particularly in the perfection and priority of such security interests. The conflict between the two sources of law makes it difficult to determine where a security interest must be registered in order to be perfected. The conflict also creates conflicting registers for such interests. Due to conflicting registration provisions it is also difficult to determine the priority of conflicting security interests in an IP right. Additionally, IP laws are often inadequate for determining issues on perfection and priority. The thesis will offer suggestion on legal reforms which will best alleviate the legal problems of taking security in an IP right. 3 ACKNOWLEDGMENTS It would not have been possible to embark on the course of study for a PhD without the help and support of the people around me, only some of whom are mentioned here. I would like to thank my supervisor, Dr. Spyros Maniatis, who provided support, advice, expertise and patience. He has been instrumental in making this thesis possible. I would also like to acknowledge the financial and academic support from CCLS at Queen Mary who gave me the opportunity to carry out my research. Also, I am grateful to Angie Raymond, my second supervisor and friend, who set me on this journey and stayed the course until the end. Finally, I would like thank my husband, Steven J. Richards, whose support and excellent legal insight has been invaluable. 4 TABLE OF CONTENTS Chapter 1 – Introduction Chapter 2 – The Use of IP as an Asset Chapter 3 – Valuation of IP Chapter 4 – Secured Interests in IP in the UK Chapter 5- Secured Interests in IP in the US Chapter 6 –International Harmonization Chapter 7 – Securitisation of IP Chapter 8 - Conclusions 5 CHAPTER 1: INTRODUCTION Intellectual Property and finance are intrinsically linked and can allow a company to achieve exponential growth. IP rights can be used as collateral to obtain financing which allows the IP owner to expand its portfolio of intellectual property rights and so on. This interaction between Intellectual Property (“IP”) and finance can lead to a virtuous spiral of company growth. In theory, the growth spiral is simple and elegant, however, in practice, the growth spiral is often inhibited because of the inherent tension between IP laws and the laws of secured lending. The current state of law makes it difficult for IP owners to use their IP as collateral. This problem is becoming more important because in an increasing number of companies have found that their most valuable assets are their IP rights. It is also problematic for the economy as a whole as traditional financing laws are strained to accommodate the digital or knowledge-based economy. 1. The Problem Despite the emergence of a new economy of intangible property, there is still a clash between the laws of secured finance and IP law which makes IP ill-suited for use as collateral. Some critics have even suggested that “[the] legal treatment (of the secured financing of intellectual property assets) is complex, cumbersome and inconsistent and in large measure, the law is unusable from the point of view of sustaining a coherent security legal regime in intellectual property assets.” 1 The statement was made in reference to the UK, but it can apply to many other jurisdictions as well. Indeed in most jurisdictions, the laws of financing, in general, are still based on tangible asset models which cause uncertainty when used on intangible assets. Legal uncertainty is further exacerbated by IP law which often includes security interests with assignments or transfers of the IP. The main area of uncertainty caused by the conflict is on perfecting the security interest and on the priority of conflicting interests. The conflict arises as both sets of law have their own provision on registration and perfection. Because of this conflict, creditors are uncertain which register to file the interest in order to perfect it. If also creates uncertainty as to which filing will have greater priority. There are also inherent problems within IP laws themselves because the laws which govern security interests were created to govern transfer and assignments of the applicable IP right. This is problematic because security interests are not an absolute transfer of the transfer of the right. In this regard, the rules on registering transfers and the priority of transfers are ill-suited to govern security interests. As Raymond states: “The intellectual property registration schemes which exist are mainly concerned with documenting the creation of intellectual property rights and not those security interests which arise by way of subsequent dealing with intellectual property as economic assets.”2 The thesis will show that legal uncertainty has made creditors reluctant to use IP as collateral or to devalue the IP right in order to hedge the risk involved. This in turn inhibits the ability of an IP owner from using their IP to obtain financing which inhibits company growth. In such cases, IP and finance are unable to interact to allow for exponential growth which results in a growth spiral (the “IP- Finance Growth Spiral”). 2. Focus on the legal position in the UK and the US This thesis will focus on how a security interest in an IP right is taken under the laws of the UK and the US. In should be noted that the UK is comprised of separate legal jurisdictions which share 1 Iwan Davies, 'Secured Financing of Intellectual Property Assets and the Reform of English Personal Property Security Law' (2006) 26(3) Oxford Journal of Legal Studies 559, 563. 2 Anjanette Raymond, ‘Intellectual Property as Collateral in Secured Transactions: Collision of Divergent Approaches’ (2009) 10 Business Law International 27, 32. 6 statutory laws in some areas.3 For example, registered IP law is governed by UK statutes which are in force throughout the UK.4 The same is true for company law which is governed throughout the UK by the Companies Act5. The Companies Act contains provisions on taking security in the assets of an applicable UK registered business entity (called a ‘company’ in this thesis).6 In cases where the IP right is owned by a business entity not governed by the Companies Act, the owner will be called an individual owner. For this reason, laws that are in force throughout the UK, such as the Companies Act and the registered IP acts, are referred to in this thesis as UK laws. However, the thesis will also discuss principles of common law and equity that relate to the taking of security in England and Wales. Such laws will be referred to as English law or the English common law. Additionally, Scottish laws on security interests will also be discussed for the sake of comparison and to show problems of UK-wide law conflicting with legal principles of individual UK jurisdictions. Laws which are only in force in Scotland will be referred to as Scottish law. The U.S. laws for taking security interest in a registered IP right are from state and federal sources. Registered IP law is solely governed by federal law.7 The laws of secured lending are harmonised throughout the US through the adoption of Article 9 of the Uniform Commercial Code.8 Article 9, therefore, is a creature of state law and is referenced as state law in the thesis. The distinction between corporate or individual ownership of an IP right is not as in important in the US. This is because state registers under Article 9 are indexed by the name of the debtor regardless of whether it is a corporate entity or individual.

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